• Dated 17^th April, 2026

ITC cannot be denied to a bona fide purchaser for supplier’s default in absence of fraud or collusion-Karnataka HC

Brief Facts

The assessee availed Input Tax Credit (ITC) on the basis of valid tax invoices for inward supplies, with transactions duly recorded and reflected in GSTR-2A. The Department initiated proceedings alleging that certain suppliers had either failed to deposit GST or were non-traceable, thereby questioning the genuineness of the transactions. On this basis alone, ITC was denied and demand along with interest and penalty was raised against the assessee.

Assessee's Contention

The assessee contended that all conditions under Section 16 of the CGST Act, 2017 were duly satisfied, including possession of valid tax invoices, receipt of goods/services, and proper documentation. It was further submitted that payments were made through banking channels and transactions were genuine. The assessee emphasized that there is no statutory mechanism or obligation requiring the recipient to verify whether the supplier has deposited tax with the Government (GSTR-3B compliance). Therefore, denial of ITC due to supplier default, in absence of fraud or collusion, is arbitrary and unsustainable.

Department's Contention

The Department argued that ITC is not admissible where the supplier has failed to deposit tax or is found to be non-traceable, as this casts doubt on the genuineness of the transaction. It was contended that the recipient must bear the consequences of supplier non-compliance, thereby justifying denial of ITC.

Court Held

The Court held that the assessee had discharged its burden by producing valid tax invoices, payment proofs, and GSTR-2A reconciliations, thereby establishing the transactions' genuineness. It noted that the Department failed to prove any fraud, collusion, or willful misstatement by the assessee. The Court ruled that a bona fide purchaser cannot be expected to verify the supplier's tax compliance absent any statutory mandate. Accordingly, denying ITC solely due to the supplier's default or non-traceability is arbitrary and unsustainable. The Department must pursue recovery from the defaulting supplier rather than penalizing the bona fide recipient.

BTA Comment

The ruling is a significant reaffirmation that ITC cannot be denied to a bona fide recipient merely due to supplier default, thereby limiting the harsh application of Section 16(2)(c) of the CGST Act. The Court effectively applies the principle "lex non cogit ad impossibilia" that law does not compel the impossible, recognizing that a purchaser has neither the means nor the statutory obligation to verify supplier tax compliance. By shifting the focus to genuineness of transactions and absence of fraud or collusion, the judgment moves away from strict liability towards a fairness-based approach, making it clear that the Department's remedy lies against the defaulting supplier and not the compliant recipient. This ruling elevates the evidentiary standard in ITC disputes and bolsters defenses backed by proper documentation and proven authenticity.

Case ref-Instakart Services Pvt. Ltd. v. State of Karnataka [2026] [WRIT PETITION NO. 4917 OF 2021

Author: Aindrila Ghosh

Edited by: Sneha Nandi